The Paying Old Debts Dilemma
Legally you owe a debt until its paid, settled or wiped out in a bankruptcy. Still there are some situations where paying off an old debt might actually hurt your credit even more.
First of all there is something you should know about your debt in general. Many people assume that their obligation to pay a debt ends when a creditor marks it off as a charge off. However a charge off is just a notation on the report. It does not free you from being additionally chased by the creditor. It also does not prevent the creditor from trying to collect or sell the debt to a collection agency, which can then try to get you to pay.
Your obligation to pay doesn’t end when an unpaid debt falls off your credit report after seven years. The creditor might be allowed to report the account but account collections can continue.
Similarly, your state or province’s statue of limitation ultimately defines how long a creditor or collection agency can take you to court over a debt. However even if you can’t be sued, a creditor or collector can still ask you to pay.
Although you might feel you have a moral obligation to pay a debt it isn’t always a fantastic idea when it comes to repairing credit. This is because paying old debts can actually hurt your credit score.
It might seem unfair that trying to make good can hurt your credit but that is the way credit scoring often works. When the credit or collection agency updates your credit report to reflect the payment, the date of the new activity makes the old trouble account look more recent to the credit scoring formula.
Unfortunately too contacting an old creditor can leave you vulnerable to a lawsuit/ Each state has the different guidelines but many states have provisions that allow the statute of limitations if you make payment on an old debt or even acknowledge that you owe it.
How does this happen? You make a good faith effort to pay your bill and the creditor uses that payment as an excuse to haul you into court. Law may not have permitted this action if you had just left the judgment alone – in essence, unacknowledged and unpaid. This could leave a new black mark on your file that could be reported for another seven years.
Another problem is that you are not often dealing with the original creditor. The company that you owe money to might have since cleared the debt off of its guides, taken a tax write off for the loss and sold the debt, usually for pennies on the dollar, to a collection agency.
Once a debt goes to a collection agency the original creditor may not be able to accept your money even if you offered it. This is because the original creditor may have signed a contract with the agency that prohibits this. Instead of accepting your payment the original creditor might just direct you to the collector. Many people understandably feel less obligated to pay a collection agency that bought their debts for pennies on the dollar then they do to the company that they originally owed.
Another hazard of dealing with collection agencies is they can be difficult to deal with. Many collection agents are abusive liars who are more than willing to harass you in exchange for a commission. They will use all sorts of tactics to get you to pay include humiliate you, scream at you, use obscene language and threaten you lawsuits and jail time. These are illegal actions but they happen anyway.
Even if a collector is polite he or she might do things to endanger your financial life more. They might promise to drop a bad remark from our credit file in order to get you to pay and then not follow through. They might arrange a deal that they will settle your debt and then sell the unpaid portion to another agency that renews collection activity. They can also report any debt that you didn’t pay to the IRS. The IRS can then tax the forgiven debt as income.
The collectors justify their wicked behavior because they feel that debtors are bad people who deserve it. They see you, the debtor, as an outright thief. This makes them feel like they can go to any lengths to collect your debt but occasionally they need reminding that breaking fair credit reporting and collecting laws is illegal.
If you decide to proceed make sure you’ve done your research on the statutes of limitations that may apply. If necessary you can hire an attorney. If you are lucky enough to still be dealing with the original creditor on the account try to make a deal with them that they will report on your account as positively as possible in exchange for payment.
In the situation where you make a deal with creditor to pay in exchange for a comment on your report the best possible comment is “paid as agreed.†Whatever you do don’t let them report your account as “settled†as that could leave you in worse position than if you left the account open and unpaid in the first place. This is not great for your score.
If you are dealing with a collection agency it is advisable to try your best to have the entire account deleted from your account in exchange with payment. You will have the most push doing this if you offer to pay a lump sum rather than in payments.